Internal Advice; sale for exportation; middleman transaction; T.D. 96-87; related parties; buying agent; selling agent; right to make entry.

HQ W546821 June 29, 1998 VAL RR:IT:VA W546821 AJS CATEGORY: Valuation Port Director U.S. Customs Service 2nd & Chestnut Streets Philadelphia, PA 19106 RE: Internal Advice; sale for exportation; middleman transaction; T.D. 96-87; related parties; buying agent; selling agent; right to make entry. Dear Director; This is in reply to your request for internal advice of July 24, 1997, forwarded on behalf of XXX [Company A], concerning various valuation issues. We apologize for the delay in responding. FACTS: The subject transaction is described as follows. Company A accepts volume purchase agreements from U.S. customers. Based on these agreements, Company A manufactures dies and wafers according to specific customer specifications. Company A then sells these dies and wafers to its wholly-owned subsidiary XXX [Company B]. Company B assembles, tests, marks, and packs the goods. Company B then sells the goods back to Company A on Ex-Factory sales terms, and delivers the goods to Company A's consolidation point/warehouse MSAS facility in Kuala Lumpur. Company A sells the goods to its customers on FOB-Kuala Lumpur sales terms based on purchase orders issued by its customers. Although, specific terms and conditions may vary, Company A acts as the customer's agent with the authority and responsibility to arrange delivery to their designated carrier or facility. The services that Company A provides include the arrangement for freight, insurance, Customs clearance, taxes, fees, etc., up to the designated point and time of delivery per sales contract. The fees for this service are included in the Company A invoice price to its customer. Company A will make entry of the goods based on the sale between itself and Company B. ISSUES: Whether the sale between Company A and Company B is a bona fide sale for exportation of the subject merchandise. Whether Company A is acting as a buying or selling agent. Whether Company A has the right to make entry of the subject merchandise. LAW AND ANALYSIS: The primary method of appraising imported merchandise is transaction value. Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a), provides that the transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States, plus specified additions. Thus, in order for imported merchandise to be appraised under transaction value it must be the subject of a bona fide sale between Company A and seller and it must be a sale for exportation to the U.S. The main issue in this instance is whether the merchandise in the alleged sale between Company A and Company B satisfies this description. In Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit (CAFC) reviewed the standard for determining transaction value in a three-tiered distribution system involving a middleman. The three-tiered distribution system in this case would be between Company B (i.e., manufacturer), Company A(i.e., possible middleman), and the U.S. customer (i.e., buyer). The CAFC indicated that a manufacturer's price for establishing transaction value is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In this regard, the CAFC stated that in a three-tiered distribution system: The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influence that affect the legitimacy of the sale price *** [t]hat determination can be made on a case-by-case basis. Id. at 509. See also Synergy Sports International Ltd. v. United States, 17 CIT 18. (1993). After Nissho Iwai, Customs has received numerous ruling requests asserting that transaction value is properly based on a sale which does not involve the importer, but rather a middleman and the manufacturer or other seller. Treasury Decision (T.D.) 96-87 (December 13, 1996). In our rulings, we have stated that in fixing the appraisement of imported merchandise, Customs presumes that the price paid by the importer is the basis of transaction value and the burden is on the importer to rebut this presumption. In order to rebut this presumption, in accordance with the Nissho Iwai standard, the importer must prove that at the time the middleman purchased, or contracted to purchase, the goods were clearly destined for export to the 'United States' and the manufacturer (or other seller) and middleman dealt with each other at “arms length”. In reaching a decision, Customs must ascertain whether the transaction in question falls within the statutory provision for valuation, i.e., that it is a sale, that it is a sale for exportation to the U.S. in accordance with the standards set forth above, and that the parties dealt with each other at "arms length". As stated in Nissho Iwai, these questions are determined case­by-case based on the evidence presented. In T.D. 96-87, Customs clarified some of the issues that arise in multi-tiered transactions when determining which is the sale for exportation to the U.S. for the purpose of determining transaction value. This T.D. also sets forth the documentation and information required to support a ruling request that transaction value should be based on a sale involving a middleman and the manufacturer rather than on the sale in which the importer is a party. Specifically, the requestor must describe the roles of the various parties. In this case, Company B (i.e., the manufacturer) is a wholly-owned subsidiary of Company A (i.e., the middleman). Parties, including legal persons such as corporations, are treated as related based on factors such as stock ownership and control by one person over another. 19 U.S.C. 1401a(g)(l); see also Transfer Pricing· Related Party Transactions, Cust. B. & Dec., vol. 27, no. 4, at 4 (January 27, 1993). Company B would appear to be related to Company A based on one of these factors. We assume that the U.S. purchasers are not related to either of these parties. Transaction value may be used as the appraised value of merchandise only if the buyer and seller are not related or the buyer and seller are related but the transaction value is otherwise acceptable. 19 U.S.C. 1401a(b)(2)(A)(iv). There are two conditions under which a transaction value between related parties will be deemed acceptable. 19 U.S.C. 1401a(b)(2)(B). The first is where an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable. The second is where the transaction value closely approximates certain “test” values. No information has been provided to establish the acceptability of transaction value under either of these two methods. Therefore, we are unable to determine whether the sale between Company B and Company A is acceptable (i.e., at arms length) for purposes of determining the transaction value of the imported merchandise. T.D. 96-87 also requires the requestor to furnish relevant documents pertaining to each transaction that was involved in the exportation of the merchandise to the U.S. The T.D. states that Customs is looking for a complete paper trail of the imported merchandise showing the structure of the transaction. The T.D. specifically states that relevant documents include purchase orders, invoices, proof of payment, contracts and any additional documents (e.g., correspondence) which demonstrate how the parties dealt with one another and which support the claim that the merchandise was clearly destined to the U.S. Your request has not provided any documents which show the structure of the transaction. We are also unable to determine whether a bona.fide sale occurred between Company B and Company A without this information. Your request has described the details of the transaction as follows. Specifically, you state Company A manufactures dies and wafers according to specific customer specifications based on volume purchase agreements. Company A then sells these items to Company B who assembles, tests, marks and packs the items. Company B sells these items back to Company A on the sale terms Ex-Factory and delivers them to a Company A warehouse in Kuala Lumpur. Company A then sells the merchandise to U.S. customers on the sales terms FOB Kuala Lumpur. We note that the change in sale terms generally indicates that the risk of loss and title passes from Company B to Company A on this alleged sale at the factory. The FOB sales term indicates that risk of loss and title pass from Company A to the U.S. purchaser in Kuala Lumpur. The term “FOB” (i.e., Free on Board) means that the seller (i.e., Company A) fulfills its obligation to deliver when the goods have passed over the ships rail at the named port of shipment. This means that the buyer (i.e., U.S. customer) has to bear all costs and risk of loss of or damage to the goods from that point. See Incoterms, International Chamber of Commerce, 38 (1990). Based on these sales terms and the description of the transaction, it appears that two sales may have taken place. However, we cannot make a definite determination without review of the relevant specific documentation of the transaction. Your request also raises the question of whether Company A is acting as a buying agent. Specifically, Company A claims to act as an “agent” for its U.S. customers by arranging delivery of the goods to the customer's carrier or facility, and for the freight, insurance, Customs clearance, taxes and fees. The fees for these services are included in the Company A’s invoice price to the customer. A buying agent is generally a person who acts for the account of a buyer, rendering him services in connection with finding suppliers, informing the seller of the desires of the importer, collecting samples, and inspecting goods. Company A does not appear to be performing any of these functions. Company A appears to be acting for its own account as a seller pursuant to purchase agreements for the imported merchandise with its customers, by producing the imported merchandise, selling the merchandise to Company B for further processing, buying the merchandise back from Company B, and then selling the merchandise based on purchase orders from its U.S. customers. Company A also appears to be acting for its own account since the risk of loss and title for the merchandise pass to Company A from Company B at the factory. Company A also does not find suppliers for the buyers but instead acts as the supplier itself with the aid of its subsidiary. In addition, generally a buying agency agreement will exist to indicate a buying agency. New Trends Inc. v. U.S, 10 CIT 637, 643 (1986). There is no mention of such an agreement in this instance. Therefore, Company A does not appear to be acting as a buying agent for its U.S. customers. Your request additionally raises the issue of whether Company A is a selling agent. A selling agent is generally a person who acts for the account of a seller; he seeks customers and collects orders, and in some cases he may arrange for storage and delivery of the goods. Company A also does not appear to perform any of these functions. As stated previously, Company A appears to be acting for its own account as a seller. In addition, the fees for the services performed by Company A are also reimbursed by the buyer as part of the invoice price. Company A also does not seek customers and collect orders for Company B because .it already has both based on volume purchase agreements and purchase orders with its U.S. customers. Although Company A may arrange for the delivery and clearance of the goods, the FOB sales term requires Company A as the seller to clear the goods for export and deliver the goods on board the vessel named by the buyer at the named port of shipment. Incoterms, supra, 39. Thus, Company A also does not appear to be acting as a selling agent for Company B. Your request raises the question of whether Company A has the right to make entry of the merchandise in this case. 19 U.S.C. 1484(a)(l)(A) provides that only the “importer of record” has the right to make entry. Section 1484(a)(2)(B) also provides that the “importer of record” is defined as the owner or purchaser of the goods, or when designated by the owner, purchaser, or consignee, a licensed customhouse broker. The terms “owner” or “purchaser” would be any party with a financial interest in a transaction, including, but not limited to, the actual owner of the goods, the actual purchaser of the goods, and a buying or selling agent. Customs Directive 3530-02 (November 6, 1984). Any such owner or purchaser may make entry on his own behalf or may designate a licensed customhouse broker to make entry on his own behalf and may be shown as the importer of record on the Customs Form 7501. In this case, Company A appears to no longer have a financial interest in the transaction because title and risk of loss for the merchandise passed from it to the U.S. customer in Kuala Lumpur. Consequently, Company A would not appear to have the right to make entry of the subject merchandise under section 1484. HOLDING: We do not possess enough information to determine whether the alleged sale between Company A and Company B is a bona fide sale for exportation. Therefore, the price actually paid or payable by the U.S. customers as the importer is presumed to be the basis of the transaction value for the imported merchandise. The burden is on Company A to rebut this presumption. Based on the information provided, it does not appear that Company A is acting as either a buying or selling agent. Company A additionally does not have the right to make entry of the subject merchandise as importer of record pursuant to 19 U.S.C. 1484. This decision should be mailed by your office to the internal advice requestor no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels. Sincerely, Acting Director, International Trade Compliance Division